EURO STOXX 50/S&P 500: Technical Analysis (Part 1)

I think European stocks relative to U.S. stocks are setting up for a trade to the upside (mainly EURO STOXX 50/SPX). Some analysts (see below) believe that European stocks are more attractive than U.S. stocks on a relative valuation basis and because the ECB's and Fed's monetary policies are diverging.
  1. "Is The Euro The New Yen? Increasingly So." (News Moving Markets via Value Walk, January 15, 2015)
  2. "European Earnings Set To Move Up On Low Oil Prices: Morgan Stanley" (News Moving Markets via Value Walk, January 13, 2015)
  3. "European Equities Could Return 19% In 2015 Amid Low Valuations: Barclays" (News Moving Markets via Value Walk, December 14, 2014)
  4. "European Small-Caps: Focus On Companies, Not Countries" (News Moving Markets via Value Walk, December 14, 2014)
  5. "Updated Global CAPE Shows US Expensive, Greece Incredibly Cheap" (News Moving Markets via Value Walk, December 14, 2014)
  6. "Morgan Stanley 2015 Outlook: European Equities Cheap Enough" (News Moving Markets via Value Walk, December 2, 2014)
  7. "Europe’s Dividend Yield At Record High Relative To Credit Yield" (News Moving Markets via Value Walk, November 26, 2014)
  8. "JPMorgan: U.S. Trade Is Crowded, Buy Europe" (Distressed Volatility, November 18, 2014)
  9. "USAA's Wasif Latif: European Stocks More Attractive Than U.S. Stocks On Relative Value Basis, Need Policy Catalyst" (Distressed Volatility, October 21, 2014)
I'm specifically looking at this trade on a technical basis. So to me the fundamental analysis just boosts the upside probability. I looked at charts of the Dow Jones EURO STOXX 50/S&P 500 (STOX5E/SPX), Dow Jones STOXX 50/S&P 500, (STOX50/SPX) and Dow Jones STOXX 600/S&P 500 (STOXX/SPX), and put trend lines on each index separately. I covered STOXX 50/SPX and STOXX 600/SPX in part 2.

Dow Jones EURO STOXX 50/S&P 500 ($STOX5E/$SPX)

I think STOX5E/SPX has the best technical setup in the group of ratios. If "the euro is the new yen," the Euro Stoxx 50 could take full advantage of the ECB's future stimulus plans (QE) and the euro's depreciation.

Source: Stockcharts.com

Source: stockcharts.com

Here is the Dow Jones EURO STOXX 50 index by itself. The trend is your friend for now.

Source: Stockcharts.com

To hedge against the euro's fall, HEDJ/SPY might be the way to play this in the US. HEDJ's benchmark is the MSCI EMU Local Currency Index. Here is WisdomTree's case for hedging the euro (emphasis mine):
Given that many of the themes discussed above are likely to play out over the course of the next few years, negative correlations in the eurozone may very well persist and become even more negative. To illustrate the point, Goldman Sachs recently downgraded its EURUSD 2 forecast to 1.08 in 12 months, 1.00 (parity) by the end of 2016 and 0.90 by the end of 2017.

WisdomTree believes currency-hedged investment strategies are growing in prominence due to shifting policy winds among global central banks. While the ECB and the BOJ have newly embarked on aggressive easing measures, the U.S. Federal Reserve is largely expected to begin raising rates in the middle of 2015. This policy dichotomy could signal potential for a stronger dollar in the months ahead. From this standpoint, I believe we are in the very early stages of flows heading toward currency-hedged strategies—especially for Europe.
Source: Stockcharts.com

Here is HEDJ/SPY's daily chart. There could be more sideways action if it can't break through that downtrend.

Source: Stockcharts.com

HEDJ made a new high, so investors are definitely piling into the Eurozone trade.

Source: Stockcharts.com

However, I'm specifically looking at the STOX5E/SPX ratio. For the trade to work, the EURO STOXX 50 needs to outperform the S&P 500 over the next 12-18 months. Below are charts of the S&P 500 using various time frames. I think we will see another correction in the near-term, which will pierce and potentially break through the cyclical bull market's rising wedge. SPX pierced through its cyclical uptrend line (rising wedge) in October. The current up cycle will be six years old in March.

Source: Stockcharts.com
Source: Stockcharts.com

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